What Is An Acceleration Clause?

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What is an acceleration clause on a mortgage?

An acceleration clause is a section of a mortgage contract that can require you to pay off your entire mortgage at once. Most loans will have one, and these clauses give lenders the option to call in the loan if you do not uphold all its terms. In this way, the lender minimizes the risk of letting you borrow such a big sum for such a long time.

The acceleration clause accelerates the mortgage repayment schedule. It will force you to repay the entire balance of your loan, plus accrued interest, in a single payment, under certain circumstances.

What triggers the acceleration clause?

Acceleration clauses can vary, but there are a few common contingencies that typically trigger them:

• Missed mortgage payments – It typically takes two or three missed payments for an acceleration clause to come into effect, but review your contract. Sometimes a single missed payment can invoke the clause.
• Cancellation of homeowners insurance – Stopping your homeowners insurance policy, letting it lapse or failing to maintain sufficient coverage can all be grounds for the lender to demand full repayment.
• Unauthorized title transfer – Your mortgage lender must be informed if you plan on selling or transferring your property to another person or business.
• Failure to pay property taxes – Getting in arrears or disregarding property taxes allows the state or municipality to place a lien on your home. Lenders don’t like that, since they’d come in second at repayment time if the house were seized and sold.
• Bankruptcy – Filing for bankruptcy can trigger the acceleration clause, as it makes the lender nervous about your ability to make your monthly payments.

What happens when your loan is accelerated?

If one of the above events happens, your lender will send you an acceleration letter, invoking the clause. It will outline what triggered the acceleration clause and include details on the amount you must pay and the deadline for making payment. Typically, the deadline is 30 days from the date of the letter. You’ll either need to negotiate with your lender or pay the remainder of your loan in full.

How to avoid acceleration

Here’s how to avoid triggering your mortgage’s acceleration clause:

• Avoid missed or late mortgage payments: The obvious way to avoid the acceleration clause is simple: Don’t give your lender grounds to invoke it. Make your required mortgage payments on time and in full, and follow the other terms of your loan.
• Communicate with your lender: If you know you’re going to run into issues with making payments or have another problem that could trigger the clause, reach out to your lender as soon as possible. Explain your situation and try to work together to find a solution. Odds are, they’ve had clients with similar problems before.

The point is not to try to hide or hope the lender won’t notice your transgression (because, sooner or later, they always do). And once the acceleration clause process gets invoked, it will be harder to stop it.

Options after a mortgage acceleration

Even if you do trigger the clause and receive the acceleration letter, it isn’t the end — you’ll still be able to negotiate and work with your mortgage lender toward potential solutions. Here are some options.

Forbearance

Forbearance temporarily pauses your mortgage payments when you’re struggling financially. This can help you stay afloat during setbacks, and since those payments are still reported as on-time to the credit bureaus, your credit should stay intact until your situation improves or should you need to refinance later on.

With forbearance, however, you can generally suspend only a limited number of payments. You’ll also still owe interest on the months you missed, which will make your mortgage more expensive in the long run. To see if you qualify for forbearance, contact your lender as early as you can.

Loan modification

Because the foreclosure process can be long and expensive for your lender, it might be willing to modify the terms of your loan instead, such as changing your interest rate or extending your term to help make payments more manageable.

Unlike forbearance, loan modifications are permanent, so this strategy is best if you expect to experience ongoing hardship and need a major change to your mortgage terms. To obtain a modification, you’ll likely need to submit financial documentation and a letter to your lender explaining your situation.

Refinance

Refinancing involves getting a new mortgage at different terms that can make your payments more affordable. You’ll simply use the new loan to pay off your old mortgage.

This can be a good option if you have a fair amount of equity in your property, but it might not be the right choice if you’ve already missed payments. That’s because you’re unlikely to be approved without good credit, and even if you are, the new loan rate might not be enough to meaningfully lower your monthly payments.

Refinancing also won’t help if prevailing interest rates have risen substantially since your original mortgage. If so, you won’t be able to score a lower rate, even if your personal finances are strong.

Short sale

If you’re able to find a buyer, your lender might agree to a short sale. A short sale allows you to pay off your mortgage for less than its current balance. This isn’t a route lenders like to take, however — they’ll typically only approve a short sale if your home’s value has declined and you owe more on it than the property is worth.

Accepting foreclosure

Foreclosure is a last resort, but it’s sometimes unavoidable. Your lender might be willing to accept a deed-in-lieu of foreclosure or repayment, which will keep you from having foreclosure (and its negative impact) stamped on your credit report, but you’ll still be responsible for any difference between your property’s value and the mortgage balance.

The preforeclosure, auction and eviction process vary based on state laws, and you might still be able to reclaim your home before the foreclosure sale. It is also usually a slow process, so there is time to negotiate with your lender or find other solutions.

Acceleration clause FAQ

• How do lenders decide to accelerate a loan?
  

  Lenders decide to accelerate a loan based on the contingencies specifically listed in the mortgage documents. Usually, the things that can trigger an acceleration clause relate to the lender’s risk in recouping its outlay. Things that increase that risk, such as the home becoming uninsured or the borrower missing payments, are typical triggers for acceleration.

• What is the difference between an alienation clause and an acceleration clause?
  

  Like an acceleration clause, an alienation clause also requires full repayment of the outstanding mortgage debt at once, but it comes into play in a different situation than an acceleration clause: when a homeowner sells the property. For example, if you sell your home, the alienation clause will ensure that you pay off the remaining mortgage balance before letting the new owner take over the title.